market value and earnings per

share, world enterprises

The selling firm has a low P/E ratio due to slower

growth. After the merger, the acquiring firm has a shortterm increase in EPS. This is called the bootstrap game.

effects of merger on earnings growth

In the long run, the acquirer will have slower growth due
to dilution. This graph shows why the acquirer will have a
slower growth rate in the future. The acquirer has given
up a future growth rate for an increase in current

31-3 estimating merger gains

and costs
Questions
Is there overall economic gain to
merger?
Do terms of merger make company
and shareholders better off?

PVAB > PVA + PVB

31-3 estimating merger gains

and costs
Gain PVAB (PVA PVB ) PVAB
Cost cash paid PVB
NPV gain lost
PVAB (cash PVB )

31-3 estimating merger gains

and costs
Example
Two firms merge, creating $25 million in
synergies. If Firm A buys Firm B for $65
million, cost is $15 million
PVA $200
PVB $50
Gain PVAB $25
PVAB $275 million
Cost cash paid PVB
65 50 $15 million

31-3 estimating merger gains

and costs
Example
NPV to Firm A will be difference between
gain and cost
NPVA 25 15 $10 million
NPVA wealth with merger wealth without merger
(PVAB cash ) PVA
(275 65) 200
$10 million

31-3 estimating merger gains

and costs
Economic Gain
Economic gain = PV(increased earnings)
new cash flows from synergies
=
discount rate

Table 31.3 accounting for merger of

a corporation and b corporation

Assume A Corporation pays $18

million for B Corporation

Table 31.5 key dates in oracle/peoplesoft

takeover battle

Table 31.4 possible tax consequences

when baycorp buys seacorp for $330,000
Captain Bs original investment in Seacorp
was $300,000. Before merger, Seacorps
assets were $50,000 marketable securities
and boat with $150,000 book value,
$280,000 market value

31.5 proxy fights, takeovers, market for

corporate control

Tools Used to Acquire

Companies
Proxy Contest

Tender Offer

Acquisition

Leveraged
Buy-Out

Merger

Management
Buy-Out

Table 31.6 Summary of

takeover defenses

Table 31.6 Summary of

takeover defenses
Takeover Defenses
White Knight
Friendly potential acquirer sought by target
company threatened by unwelcome acquirer

Shark Repellent
Amendments to company charter made to
forestall takeover attempts

Poison Pill
Action taken by target firm to prevent
acquisition, e.g., right for existing shareholders
to buy additional shares at attractive price,
should bidder acquire large holding